UPDATE 2-Putin calls on KGB's heirs to bust the West's sanctions

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FSB is one of core institutions of modern Russia

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Putin tells its spies to work with other agencies on security

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Says should use AI, quantum physics achievements to tackle West

(Adds background on KGB, Putin telling FSB to use AI, quantum technologies to tackle the West from paragraph 10-13)

By Guy Faulconbridge

MOSCOW, March 19 (Reuters) - Russian President Vladimir Putin on Tuesday told the Federal Security Service (FSB), the main successor to the Soviet-era KGB, to help Russian companies bust Western sanctions and expand their clout into new markets around the world.

In an attempt to sink the Russian economy and force Putin to change course, the West imposed on Russia what it casts as the toughest ever sanctions shortly after the Kremlin ordered the invasion of Ukraine in 2022.

Putin, though, says Russia's wartime economy has thrived despite the sanctions, with the manufacture of artillery shells far exceeding the West's and the Russian economy growing 3.6% last year.

In a speech at the FSB spy service's annual meeting at the Lubyanka in central Moscow following his landslide victory in Sunday's election, Putin said its spies should work with other agencies to increase the security of the banking and financial systems.

He told the FSB "to provide support to our companies that are actively developing despite the obstacles created for them and which are exploring new markets but are faced with openly hostile actions" from the West.

"Yes, they create temporary problems for us," Putin said, adding that he had spoken to the government about how sanctions had affected some large projects. "But everything, of course, will be done anyway."

The KGB, one of the most powerful institutions of the former Soviet Union with influence stretching far beyond the U.S.S.R.'s borders and far beyond simply spying and security, lost much of its power and influence when the Union fell in 1991.

But just eight years later, the KGB, by then the FSB, had one of its own - Putin - as master of the Kremlin.

'TRAITORS'

Putin casts the Ukraine war as part of a centuries-old battle with a decadent West which he says humiliated Russia after the Berlin Wall fell in 1989 by encroaching on what the Kremlin boss considers to be his country's sphere of influence.

As a KGB spy in East Germany, Putin witnessed the Soviet Union crumbling. He told FSB officers that the West was a dangerous enemy that was using an array of weapons to sow discord in Russia including propaganda, technology and finance.

He said the West was trying in Russia to stoke "smuta", a dreaded Russian word which means unrest, turmoil or trouble and is associated with the so-called "time of troubles" which preceded the rise of the Romanov dynasty in 1613.

Putin said the FSB should therefore use Russian achievements in quantum technology and Artificial Intelligence to counter the West, "seriously" strengthen its anti-terrorism activities and said counter-intelligence should be more vigilant.

"The challenges we face and attempts to undermine our development require us to work systematically and consistently in all areas. In the economy, technology, culture, in the social sphere, in strengthening our state and public institutions," he said.

After Ukraine tried to use Russian proxies to pierce Russian borders, Putin said such traitors should be hunted down.

"We will punish them without limitation wherever they are." (Reporting by Reuters; Editing by Emelia Sithole-Matarise)